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TommyIV's TSP Talk Blog

Some Perspectives on the F-fund

It has been no secret bonds have been a poor investment this year. The F-fund is down 2.28% in 2018 as of February 27th making it the only TSP fund with a negative return. The underperformance of the F-fund stands out when compared to the outperforming C-fund which is up 2.95% in 2018. With the recent correction in the major stock indices, there has been an increase of uncertainty in the stock market despite the fact that those indices seem to be on course to erase those correction losses in record time. But no one knows how stocks will react once they have reached their tops.

Is it time to add some F-fund to your TSP allocation? There are two sides to that coin. While long-term charts may suggest so, a new economic environment may keep investors hesitant.
Technical Support

With the new added uncertainty in stocks, I am questioning if bond market prices are now low enough and yields are high enough to attract buyers to the bond market. Buy low, sell high right? This does include calling a bottom which is just as impossible as calling a top.

The chart below is of the last 3 years of bonds (AGG / F-fund). It does provide technical evidence that the bond market is now hitting long-term support from previous bottoms of the last few years. In the two cases prior, bonds sold-off sharply before flipping momentum to the upside. Now the question is if we can expect the same outcome in the new economic environment.

The yields on the U.S. 10-year Treasury Note have spiked up thus far in 2018 driving bond prices down. However, yields will have to test the highs of 2013, which may act as resistance, in order to keep this new momentum going. If the old highs hold as resistance, we may see interest rates fall. This is the pattern, but there are other contributing factors to account for other than suggestive charts.

The New Economic Environment

Economic growth tends to pull investors out of bonds and into riskier assets such as stocks. Today (February 27th) we heard the new Federal Reserve Chairman Jerome Powell in his first congressional testimony discuss his expectations of the continuation of economic growth in the U.S. This included the Fed's goal of keeping inflation in a range around 2%.

Higher inflation decreases the purchasing power of bonds fixed payments. If the economic growth does accelerate and Fed doesn't increase interest rates fast enough to keep inflation stable, bonds should be negatively affected.

We have a new environment now as the trump administration has lowered taxes and increased spending. This is suspected to heat up the economy and lead to sharper inflation. Also, with less money coming in and more money leaving the government, investors will question where the money to pay back government bonds will come from.

Perspectives

I'd like to make clear I am not advocating to put your money into the F-fund. I am rather providing a couple perspectives of many to guide you on your own investment plans. I'd like to hear from any of you on any ideas you have of where you think the bond market and stock market will turn next.

Good luck and thanks for reading. You can read our daily market commentary at the Market Comments page. If you need more help deciding what to do with your account, perhaps one of our Premium Services can help.

The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.